SWF - Some What Fishy?

The current flavour of the spring season looks to be 'Sovereign Wealth Funds' - SWFs , as we lovingly call them. Looks like SWFs are here to stay and will keep us glued to their doings.

The European Commission has sounded the bell and released its intentions to lay down a 'code of conduct' for these Knights in gleaming purses. Commission President José Manuel Barroso, while acknowledging their recent contribution also said the commission would not propose legislation on dealing with such funds that have invested in sensitive industries, though it reserved the right to do so if voluntary means failed to achieve transparency. See the EC release of yesterday - http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/313&format=HTML&aged=0&language=EN&guiLanguage=en

One sees governments and regulators getting increasingly jittery over the SWFs landing on their shores to put their footprints prominently. There is always a feeling that SWFs are investing for political purposes rather than pure profit.  Wariness of SWFs is not exactly yesterday's news.  Two years ago, hundreds of thousands of Thais took to the streets after Prime Minister Thaksin Shinawatra and his family sold a controlling stake in Shin Corp., the country's biggest mobile telecom conglomerate. It was a sweetheart deal that generated Thaksin almost $2 billion of tax-free wealth. In the chaotic aftermath of the scandal, elections were hastily called and the Thai military eventually took over. Shin's acquirer was Temasek Holdings Ltd.  the Singaporean sovereign wealth fund, which found itself the object of Thai fury as well. We have also seen opposition to the P & O deal and recently Qatari fund facing opposition on a Scandidavian stock exchange takeover.

The commission claims it wants a common approach to avoid unilateral action by member states that could distort the bloc's internal market. The code communication sets out five principles:

1. commitment to an open investment environment both in the EU and elsewhere, including in third countries that operate SWFs;
2. support of multilateral work, in international organisations such as the IMF and OECD;
3. use of existing instruments at EU and Member State level;
4. respect of EC Treaty obligations and international commitments, for example in the WTO framework;
5. proportionality and transparency.

Of these, 1 and 5 seem perfectly palatable and is not likely to ruffle any feathers. But 2 and 4 seem to be loaded. Principle 2 seems to be shoving SWFs again towards IMF and OECD; who haven't exactly made friends in the developing world. Principle 4 seems to be offering a bureaucratic cloak over  free flow of speedy funds.

Barroso seems to be rubbing it in further by saying "The Norwegian sovereign wealth fund is exemplary in terms of transparency, governance and accountability,"  Of course, the Norwegian fund seems to be the most open and transparent in its intentions and functioning. See http://www.regjeringen.no/en/dep/fin/Selected-topics/The-Government-Pension-Fund.html?id=1441 , what I mean here.

The commission wants to finalize the necessary consensus and give the legislative effect by April 2009. This promises to be an interesting season of debate! The constitution and DNA of each of the SWFs is distinct. Which means each SWF is going to have a unique view on this code.

Well, like it or not, SWFs are here to stay and many of the 'global giants' will look to them for succour. Just a parting thought; who will save us if any of these SWFs go bust on bad investments!!